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Price and income convergence and the dynamic Penn effect in Central and Eastern Europe

Author

Listed:
  • Moritz Degler

    (Oxford Economics Ltd)

  • Karsten Staehr

    (Tallinn University of Technology
    Bank of Estonia)

Abstract

The dynamic Penn effect denotes a close relationship between relative income and price levels over time. This paper examines whether the effect is present in the 11 EU countries from Central and Eastern Europe over the period 1995–2018. The analysis comprises estimation of Pooled Mean Group panel data models. The estimations reveal a long-term relationship between the relative income and price levels, confirming the presence of a dynamic Penn effect. The long-term elasticity of the price level to income is slightly below one half. The adjustment to the common long-term relation differs substantially across the countries but is generally relatively slow, meaning that there can be extended periods of deviation from the common long-term relationship. The results are robust to various sample changes and to the inclusion of additional variables in the long-term specification.

Suggested Citation

  • Moritz Degler & Karsten Staehr, 2021. "Price and income convergence and the dynamic Penn effect in Central and Eastern Europe," Economic Change and Restructuring, Springer, vol. 54(3), pages 621-635, August.
    • Handle: RePEc:kap:ecopln:v:54:y:2021:i:3:d:10.1007_s10644-019-09248-6
    DOI: 10.1007/s10644-019-09248-6
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    References listed on IDEAS

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    Cited by:

    1. Kong, Dongmin & Shi, Zheng & Xiong, Mengxu, 2024. "Currency overvaluation and export product quality: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 93(C).
    2. Karsten Staehr, 2016. "Exchange Rate Policies in the Baltic States: From Extreme Inflation to Euro Membership," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 16(04), pages 09-18, January.
    3. Nicolas Reigl & Karsten Staehr, 2020. "Negative Interest Rates in the Five Eurozone Countries from Central and Eastern Europe," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 21(01), pages 24-30, April.

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    More about this item

    Keywords

    Price level; Real exchange rate; Convergence; Dynamic Penn effect; Pooled Mean Group estimation; Central and Eastern Europe;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • O57 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries
    • P24 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - National Income, Product, and Expenditure; Money; Inflation

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